Moderna's Innovation Still Building a Moat

Moderna’s MRNA mRNA technology has gained rapid validation as sales of its COVID-19 vaccine soar in 2021, but we think the company has yet to secure a narrow economic moat around its business, largely due to uncertainties tied to an evolving virus and the changing competitive landscape for innovative vaccines.

In a record-breaking span of just 11 months, Moderna created, developed, manufactured, and got regulatory authorization for mRNA-1273, a two-dose COVID-19 vaccine that is one of the first two mRNA vaccines ever authorized (alongside Pfizer/BioNTech’s PFE/BNTX BNT162b2). The pandemic accelerated Moderna’s evolution into a commercial-stage biotech, and we expect that the company’s ramp-up in manufacturing and clinical know-how will pave the way for faster timelines for additional programs. Moderna’s mRNA platform, involving rapid design and similar manufacturing across programs, allows the company to pursue multiple programs in parallel. Moderna also retains full rights to most of its programs, although key partnerships with Merck MRK and AstraZeneca AZN help support its efforts in oncology.

We expect the company to report nearly $19 billion in COVID-19 vaccine sales in 2021, with $17 billion in sales in 2022 as pandemic-related demand begins to decline but demand for boosters expands. We see potential for sustained revenue in the low-single-digit billions annually if higher-risk populations continue to receive annual vaccines beyond the pandemic, although there is high uncertainty around the number of long-term competitors (including new mRNA players) and pricing.

Moderna’s most advanced program outside COVID-19 is for cytomegalovirus, a leading cause of birth defects, but several other vaccines are in earlier trials, targeting other respiratory viruses like RSV and influenza. We see each of these as more than $1 billion annual sales opportunities. Moderna is also pursuing therapeutic cancer vaccines with Merck, as well as regenerative therapeutics and intratumoral immuno-oncology therapies with AstraZeneca, which we include in our valuation. We don’t include Moderna’s secreted or intracellular protein programs in our valuation, given the early stage of their development.

Threat of Value Destruction Prevents Moat

The stellar safety and efficacy profile of Moderna’s COVID-19 vaccine has rapidly validated the company’s mRNA technology, and we expect returns on invested capital to remain sustainably above our 9% assumed cost of capital beginning in 2025 in our base case and 2027 in a bear case. However, we see threats of major value destruction that preclude us from awarding a narrow moat rating to the company. Moderna is already serving a critical role in vaccinating millions of individuals during the pandemic and has several potential first-in-class vaccines in testing that could serve significant unmet needs. We think it has both the funding and the technological capabilities already in house to bring most of these programs to market. However, we see uncertainty around its defenses against other novel mRNA vaccine market entrants, and we think the company is still in the process of building a moat, as we expect multiple new competitors will be entering the vaccine market during and following the pandemic.

Despite the early lead that Moderna and BioNTech hold, and their clear dominance in the pandemic market for COVID-19 vaccine sales, we’re not yet convinced that COVID-19 will require widespread annual booster shots, and if so, whether these companies will remain dominant in the long run. Moderna’s ability to launch differentiated mRNA therapies beyond COVID-19, ranging from prophylactic vaccines for other respiratory diseases to cancer treatments, will be key to establishing a moat, in our opinion, and multiple competitors are lining up that could interfere with Moderna’s potential to see the kind of monopoly pricing power enjoyed by other innovative vaccines (Glaxo’s GSK Shingrix, Pfizer’s Prevnar) launched in recent years. Moderna’s platform technology allows new genetic sequences to be easily inserted to create new therapies, and virtually identical, cell-free, low-volume manufacturing across programs should allow flexible manufacturing, but these characteristics--which allowed it to vault to the lead ahead of older technologies during the pandemic--could also make it more vulnerable to other competitors with similar technologies.

The COVID-19 pandemic has taken a heavy global toll but has also provided Moderna with the opportunity to accelerate the validation of its technology. In less than a year, the company went from obtaining the sequence for the SARS-CoV-2 spike protein (January 2020) to completing a large phase 3 trial and receiving emergency use authorization from the Food and Drug Administration (December 2020). This is dramatically faster than past vaccine development timelines.

Moderna’s vaccine showed a 94% efficacy rate against COVID-19 and 100% efficacy against severe disease in a large phase 3 study in adults, and the company is on pace to deliver more than 900 million doses of the vaccine globally in 2021 and generate $19 billion in COVID-19 vaccine sales, roughly 28% of a total $67 billion global COVID-19 vaccine market in 2021, by our projections. Moderna’s COVID-19 pipeline is also full as the company attempts to prepare for future variants that could bypass protection from its first-generation vaccine. Phase 2 is ongoing for a third dose of the authorized vaccine, a third dose using variant vaccine mRNA-1273.351, or multivalent vaccine mRNA-1273.211 containing both versions, and preclinical top-line data indicates that the two new vaccines provide broad immunity. Next-generation vaccine mRNA-1283 (in phase 1) could be more stable at refrigerated temperatures and effective at a lower dose. With both the efficacy/safety of the technology and the ability to scale manufacturing now largely validated, we think this lowers the risk the company faces as it expands into other markets and also shortens timelines for further development.

Intellectual Property Is Strong and Multilayered

Moderna’s intellectual property is similar in nature to IP at other oligonucleotide-focused companies like Alnylam ALNY and Ionis IONS, although the precise technology is different. Moderna’s medicines use mRNA, which the company refers to as “the software of life,” to deliver instructions for a patient’s own body to produce a given protein, which can either trigger an immune reaction (prophylactic vaccines like the COVID-19 vaccine, or oncology vaccine programs) or replace a protein that is missing or faulty. Moderna’s IP protection stems from the company’s broad mRNA technology (including sublicensed patents), formulation (including methods of using specific, proprietary lipid nanoparticle delivery technologies), and also the exact composition of matter (encoded antigen) for individual products. Protection extends through at least 2033 for issued patents and beyond 2041 for pending patents.

Moderna gained access to valuable patents from the University of Pennsylvania covering modified mRNA technology through a nonexclusive license (via mRNA RiboTherapeutics and its affiliate, Cellscript), so other companies could also license the fundamental technology allowing mRNA to function as a therapeutic. In fact, while Moderna, CureVac CVAC, BioNTech, and GlaxoSmithKline own nearly half of mRNA vaccine patent applications, several other companies, large and small, have patents in the field, making it a highly fragmented space. The success of COVID-19 vaccines is likely already leading to an explosion in patent applications for innovations in the space, as well. It is possible that Moderna’s experience with artificial intelligence and proprietary digital technologies could allow it to design the best mRNA sequences for protein expression, and ample cash could give it an edge in ongoing proprietary work on new delivery technologies and lipid nanoparticles. However, we’re not convinced that Moderna has erected enough barriers to competitors, given the significant funding flowing into this nascent and extremely promising market where Moderna and BioNTech have laid the foundation.

Prophylactic Vaccines Are Key Initial Focus

With manufacturing rapidly brought to a massive scale, we think Moderna’s technology platform could be applied in numerous areas but looks particularly promising and well validated in other prophylactic vaccine markets. Prophylactic vaccines require a finite number of small doses of mRNA and have shown positive efficacy data (strong ability to generate neutralizing antibodies) against several different viruses beyond COVID-19, and Moderna has nine such programs in clinical development. We include sales in our valuation model for the leading five programs that are most advanced.

Among Moderna’s prophylactic vaccine programs, endemic respiratory viruses are a key target and the lowest-risk programs, thanks to similarities to COVID-19 vaccines. While the $4 billion global influenza vaccine market is already crowded and has poor pricing power, Moderna’s technology could allow the company to provide higher efficacy than traditional vaccines, which in a good year are only 60% effective. With a shorter lead time due to faster manufacturing (traditional vaccines take six to nine months, but mRNA vaccines, once manufacturing and approval pathways are established, could perhaps take one to two months), Moderna should see a higher likelihood of targeting the key strains that will circulate in the upcoming season. This would also mean less time to allow for antigenic drift (accumulating mutations in the virus strains), and manufacturing outside of egg-based systems would avoid the problem of egg adaptation (the antigen code changing during manufacturing). In addition, if Moderna’s vaccine is more effective, a higher percentage of individuals could opt to receive it; only about half of Americans receive a flu shot annually today.

In addition, mRNA technology theoretically allows vaccination against multiple pathogens at once. For example, Moderna and key competitor BioNTech are both likely to pursue coronavirus/influenza combination vaccines. The broader the menu of first-in-class vaccines, the more entrenched Moderna could become. Several innovative vaccines on the market today from entrenched vaccine players are priced in the hundreds of dollars because of limited competition.

That said, we’re not prepared to assume that Moderna will see pricing at the level of current innovative vaccines, given the evolving competitive landscape. For example, RSV vaccines are in development at companies like Pfizer and Johnson & Johnson JNJ, and multiple mRNA-focused companies are building pipelines that attempt to mirror Moderna’s. Competition could come from established vaccine companies partnering with innovative mRNA companies, other mRNA companies, or vaccines using other technologies (including protein-based vaccines).

Moderna’s most advanced prophylactic vaccine program includes six pieces of mRNA that create protein subunits that self-assemble inside the cell. The target is cytomegalovirus, a leading cause of birth defects. Moderna aims to establish differentiation with its ability to target such a complex antigen. Moderna plans to enter phase 3 in 2021, although Merck and Pfizer/BioNTech could be close followers in this indication. Epstein-Barr virus and HIV are other programs that are likely to be defined by their complexity, which could make it difficult for other non-mRNA vaccines to compete.

Moderna’s remaining prophylactic vaccines focus on public health threats that could emerge in the years beyond the current COVID-19 pandemic, including vaccines against Zika virus (entering phase 2) and Nipah virus (entering phase 1).

Other Programs Have Broad Potential but Lower Chance of Success

Beyond prophylactic vaccines, Moderna has less validation for its technology, but broad potential. We include oncology programs in our valuation model but assume a low probability of success on personalized cancer vaccines. Two lead programs, both partnered with Merck, aim to activate a cancer patient’s T-cells by administering mRNA coding for neoantigens (antigens that are unique to tumor cells). One approach is a personalized cancer vaccine that treats cancer by administering mRNA coding for multiple tumor neoantigens that T-cells can recognize, allowing a patient’s immune system to recognize tumors more easily. The PCV program is unique to each patient. Despite the massive potential of this technology, we only assume a 10% probability of success, given the difficulty in successfully identifying antigens that will lead to an immune response to a patient’s cancer, as well as the novelty and early-stage nature of the program.

In contrast, another program targeting KRAS mutations would broadly treat patients in this category, including a significant portion of lung cancer patients harboring such mutations. KRAS mutations are seen in 22% of cancers but have been difficult to directly target with existing small-molecule and biologic drugs due to the shape of the KRAS protein itself.

Beyond the Merck partnership, intratumoral immuno-oncology therapies can be combined in an attempt to activate microenvironments to drive T-cell responses to cancer and could be combined with existing checkpoint inhibitors. Moderna is also looking at localized regenerative therapeutics for diseased or injured tissue, led by a VEGF program in heart failure, which is partnered with AstraZeneca.

Moderna also has systemic programs for secreted proteins, which could compete with established biologic therapies including recombinant proteins and antibodies, although we don’t yet include these in our valuation model because of the early stage of their development and past challenges in getting dosages to levels that are both safe and effective. That said, Moderna has achieved therapeutic levels of antibody protein in its chikungunya program, which lowers overall risk in its therapeutic proteins pipeline and could allow the company to compete in the broader $200 billion secreted therapeutic protein market.

No Moat Now, but We See a Positive Trend

We assign Moderna a positive moat trend rating, as we see its underlying intangible assets surrounding its mRNA technology as strengthening with additional investment in the broad pipeline. Moderna already holds strong intellectual property around its proprietary mRNA therapies. Several other companies have access to key patents on modified mRNA, but we expect Moderna will continue to improve its proprietary digital technology to tweak mRNA sequences and lipid nanoparticle delivery to improve safety and efficacy, extending use into new areas. We think ROICs will peak in 2021 with the massive cash flows from the COVID-19 vaccine, then decline rapidly as the pandemic passes in 2023 and 2024, with steadier, long-term ROIC growth beginning in 2025. We expect leading vaccine programs, such as influenza and CMV, could begin to launch by 2024, and we assign a 60% probability of approval to each of these opportunities, supporting our positive trend rating. Multiple other vaccines could launch in 2025 and beyond.

We are carefully watching Moderna’s pipeline progress beyond COVID-19 for signs of durable competitive advantages. However, given the surge in industry investment in vaccine development during the pandemic, and the existence of several mRNA and antigen vaccine players that have competitive technologies, we’re hesitant to assume that Moderna’s remaining portfolio will remain significantly differentiated in the long run, and we think the company has yet to establish a narrow moat.

Competition Among Risks

We assign Moderna a very high fair value uncertainty rating, given the potential for rapid changes in the competitive landscape and in the COVID-19 virus itself. Beyond COVID-19, Moderna’s technology is still largely unproved, and competing technologies could prove safer and more effective.

Our uncertainty rating for Moderna is not materially affected by environmental, social, and governance risks, although we see access to basic services (tied to potential U.S. policy reform on drug pricing, the potential waiving of IP rights to expand access to vaccines, and vaccine hesitancy) as the biggest potential ESG risk that Moderna needs to manage. We include policy risk in our bear-case scenario, given our estimated probability (25%-49%) of such changes coming to fruition, although this does not have a large impact on our bear-case fair value estimate. Some countries may waive IP rights, allowing other manufacturers to produce the vaccine and expand access. We assume a 10%-24% probability that Moderna’s IP rights will be waived during the pandemic, but we expect this to have an immaterial impact, given the company’s proprietary technological know-how and shortages of raw materials. Lastly, vaccine hesitancy could plague vaccine-focused companies like Moderna if new concerns about safety issues begin to emerge from the company’s novel mRNA vaccines. We model this into our base-case demand assumptions, but as mRNA vaccines are in high demand globally, this is immaterial to our valuation (less than 10% impact).

On product governance, safety issues could also be a source of litigation costs for Moderna in the long run. That said, as millions of individuals have received Moderna’s COVID-19 vaccine with no serious side effects, we assume less than a 25% probability of significant litigation occurring, and we don’t include potential future litigation costs in our valuation model.

Moderna raised $1.85 billion through two equity offerings in 2020, ending the year with cash and investments of $5.25 billion. This added substantially to the company’s IPO proceeds in 2018 of $563 million. Given Moderna’s massive expected COVID-19 vaccine sales in 2021 and lack of debt, the company’s financial strength looks solid.